Wow! Geithner’s plan is ridiculous!

It turns out that Geithner’s plan is way worse than anyone could have predicted, as described by Joe Stiglitz, Andrew Ross Sorkin and other economists.  Here is a simple way of seeing how bad it is.

Suppose that you have two toxic assets, each with a face value of $100, but each worth only around $25.  In the procedure that Geithner proposed, you could buy the first toxic asset from yourself for $100 and the government would purchase the second for $100.  (The way the plan works is based on a single asset of $200; however the example here leads to the same transfer of money from taxpayers as the real plan and does so in a similar manner.  In addition,  you can’t really purchase your own assets, but clever financial and legal experts can achieve the same outcome while making it legal.)   So, you have already sold one of your toxic assets to the government for $75 more than it is worth, and you broke even on the other.  But it’s even better for you (and worse for the taxpayers).  You only need to put up $15 to keep your first toxic asset and the government puts up $85.  And if your toxic asset eventually sells for less than $85 (which it will),  you lose only the $15.

Summary.  You have exchanged two toxic assets worth a total of $50 for $185 dollars from tax payers.   This results in a massive transfer of money from taxpayers to those who own the toxic assets.

When the stock market went up by several hundred points following Geithner’s announcement, it clearly did not understand what a good deal it was for Wall Street, or else it would have gone up much more. It also didn’t understand that  such a foolish deal for the government will not actually be carried out.  Or will it?

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2 Responses to “Wow! Geithner’s plan is ridiculous!”

  1. Larry (IEOR Tools) Says:

    It really makes your head swim. I’m wondering if anyone looks at the numbers before they release to the public the plans. Does anyone know if any Operations Research folks helping at all? Who are they consulting with?

  2. euandus Says:

    I saw Andrew Sorkin on Charlie Rose last night. I think he is weening himself off being a Wall St apologist as he too has come to realize the bankers’ folly (presumptuousness) in fighting attempts to regulate the industry so the crisis of 2008 doesn’t happen again. In case you are interested, I have just posted a piece based on his discussion.

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